Book Review: Profit from the Peak

One of the threats from peak oil is the potential for financial ruin as oil prices run up. If you were invested in airline or automotive stocks through the recent run up in oil prices, you have probably seen those investments lose a lot of value. If, on the other hand, you were invested in oil futures, oil companies, or oil field service companies - you have probably seen those investments gain ground even as the overall stock market slumped. The idea of profiting from the peak - an event that is likely to cause misery for those who are least prepared - may seem an odd combination. It almost feels like “Profit from Homelessness.” But the reality is that unless you understand how energy prices affect the prospects of various sectors, you are placing yourself at a financial disadvantage.

Thus Profit from the Peak - the new book co-authored by my friend Chris Nelder - was destined to spark a lot of interest. Chris and I agree on most things energy-related, but we do also have some areas of sharp disagreement. In this review, I will explain what I liked about the book, but I will also detail my differences. Consider this a partial review, and a partial commentary on some of the particular topics in the book. Do not consider my comments as investment advice.

First off, The Oil Drum was referenced a great many times in the book. The work from many of the regular contributors was featured in the book. The first chapter was an introduction to peak oil, and it argued that peak oil is upon us. The information in the first chapter will bring a person up to speed on the potential problems we are going to experience from peak oil, but it also provides background information such as how oil is formed and subsequently refined.

Moving on to Chapter 2, the book gives a good explanation of oil depletion, and provides a nice overview of the major oil producing countries. But it also brings up the first area of disagreement that I had with the book - and that is valuation of oil companies. As the book states when talking about investing in blue chip oil companies, “we wouldn’t touch most of them with a five-mile drilling rod.” I have a different opinion.

Theirs is not an unusual argument: Oil companies are seeing their reserves and production rates decrease, and therefore their stock values are bound to follow. But let’s consider the case in which a company sees a 5% drop in their oil production rate, and yet the price of the remaining oil they are producing increases by 50%. This is not too far off the mark from what we have seen happen. What has been happening - and what I think will continue to happen - is that prices will rise faster than production rates will drop. That means that the value of an oil company’s reserves will increase year after year, even as their production rates decline. The argument that oil companies won’t weather peak oil very well discounts (or ignores) this.

Consider the case of ConocoPhillips (COP). Full disclosure, ConocoPhillips was my previous employer, and I am still a stockholder. Here’s why I still own COP, and will for the long haul. According to the 2007 annual report for COP (you can download it here), proved reserves at year-end 2007 were 10.6 billion barrels of oil equivalent (BOE), down 5.4% from 11.2 billion BOE at year end 2006 (this, primarily a result of the exit from Venezuela). At the end of 2006, the world average crude oil price was $55.95. At the end of 2007, the world average crude price was $89.76 - up 60% over year end 2006. Today, the world average crude price is $126.06 - up 125% over year end 2006.

Thus the value of COP’s oil reserves has more than doubled in the past year and a half, even though production has fallen by a little over 5%. (Note that this comparison is approximate, as the majority, but not all, of the BOEs are from oil). Further, the total value of COP reserves at today’s average crude price is $1.3 trillion - and I think prices are going higher in the long-term. The market cap for COP is about 1/10th of that at $142 billion. The market is seriously discounting the run-up in prices when evaluating oil companies like COP. Each $1 gain in crude prices increases the underlying value of COP’s reserves by $10 billion. Yet you could buy COP a year ago - with oil trading at $60/bbl, for only 20% less than the current price. Investors must expect that oil prices will fall back to the $80 range.

However, there are two caveats to consider when evaluating oil companies. One is that governments are bound to intervene as oil company profits continue to rise. If oil goes to $200 and then keeps rising - Big Oil is going to make a ton of money. Government are going to be under pressure from upset citizens to do something about this, and they will likely put various sorts of windfall profits taxes into effect. There will also be calls to nationalize, but the oil companies would likely just move to friendlier countries.

The second caveat is that the trend of falling production can’t continue forever. At some point, the oil companies are going to have to make some strategic decisions and become much more diverse in their energy offerings. But since prices have been rising faster than production is falling, they are likely to have loads of cash for getting into other energy businesses. It is admittedly an atypical investing situation - negative production growth combined with sharply higher revenue growth. But unless you think production is going to fall faster than prices will rise, I think oil companies are a pretty safe bet.

The other area that Chapter 2 missed on was the situation with refiners. While negative on Big Oil, the book was very bullish on refiners such as Tesoro (TSO) and Valero (VLO). Quoting from the book “Valero and Tesoro are going to make a pretty penny every hour they operate their refineries.” Of course that depends on one very important issue: The ability to maintain decent crack spreads. Unfortunately for pure refiners, softening demand has prevented them from increasing gasoline prices at the same rate that oil prices have gone up. As a result, refining margins have been crushed. Big Oil has the advantage of being able to absorb soft refining margins. After all, they are currently producing and selling oil for $130 a barrel. Valero, on the other hand, is buying oil for $130/bbl. As a result, in the past 12 months Valero has seen their stock fall by 40%. Over the same time period COP has seen share prices rise by 21% (and in the past 5 years, COP shares have increased by 240% - not bad for a Blue Chip).

Chapter 4 makes the case that the true cost of oil - when the negative externalities are factored in - is $480/bbl. I have only minor quibbles there, and in general agree with the overall point. I found Chapter 5 - The Pentagon Prepares for Peak Oil - to be a very interesting read. I had never really thought about it, but the book points out that the U.S. Department of Defense is consuming well over 100 million barrels of oil a year - the most of any government agency in the world. Imagine what $130 oil is doing to defense budgets. This chapter also makes the pertinent point that we have outsourced a lot of our manufacturing - and therefore our CO2 emissions - to China. Thus, it is hypocritical of us to blame the Chinese for their fast-growing carbon emissions.

Part II of the book is “Making Money from the Fossil Fuels that are Left.” This section was generally a good, fact-filled read. The information on methane hydrates was quite interesting. The book stated that the U.S. possesses methane hydrate reserves equivalent to 56 trillion barrels of oil. Of course it will be a difficult prospect to extract them commercially. This section also put oil shale claims into perspective, pointing out something that has long been apparent: Break even is a moving target, and it tends to move up along with oil prices. I have noted this for years, but I never defined it with a catchy name like the Law of Receding Horizons. Oil shale always seems to be economical at the current price plus $10-$20/bbl.

I did find inaccuracies in this section. For the layperson, most of these are trivial. But if you think about energy most of your waking hours, some of the inaccuracies will feel like an itch that needs to be scratched. For instance, on Page 96, natural gas is described as a mix of methane and propane. Propane was probably a typo, as natural gas is primarily methane and ethane. Page 109 states that ExxonMobil shelved their $15 billion LNG plant in Qatar. That was actually a proposed GTL plant. And on Page 117, the book states that diesel produced from CTL emits twice the volume of greenhouse gases as normal diesel when you burn it - and another ton of CO2 per barrel when you make it. That’s a misstatement. CTL diesel produces exactly the same CO2 emissions as normal diesel (after all, it is chemically the same as regular diesel) when you burn it. It is the production process of CTL that causes the overall carbon footprint to be so high.

There were two comments on tar sands that I disagreed with. One is on Page 127, and states that the total net energy gain is only 5 or 10%. That would make it worse than corn ethanol. Yet on Page 122, the EROI for tar sands was stated to be “as low as 5.” An EROI of 5 indicates a net energy gain of 400% (invest 1 unit, get 5 back, the net is 4 and the net gain is 400%). The second disputed argument is that tar sands must be totally dependent upon natural gas, or the construction of dozens of new nuclear plants. Thus the conclusion is that tar sands can’t scale up much. But if in fact the net energy return is 400%, the solution is easy. If you don’t have natural gas, you cannibalize and burn part of your production to drive the process. That will be an economic decision, but will become more attractive as natural gas supplies deplete and drive prices up. (Note that this isn’t an endorsement of tar sands production, as I agree with the book that there are many environmental concerns surrounding the process).

The last and final section of the book, Part III, was Energy after Oil. I particularly enjoyed the section on geothermal power, as I think this alternative option doesn’t get enough coverage. The book did a good job of clearly explaining how geothermal works, and identified some potential investments in the sector. This section also does a good job on wave and tidal energy, takes on the hydrogen economy, makes strong arguments in favor of carbon taxes, and argues that the future will be electric.

Again I found some nits to pick about the biofuels coverage. On Page 142, it is stated that biodiesel can be used as a 100% blend. However, there are no warnings about the cloud and pour point issues surrounding straight biodiesel. Try running straight biodiesel in very cold weather, and you could end up with a frozen tank of fuel. I had a few minor quibbles around the ethanol section (Despite the hype, Brazil does not get 40% of their motor fuel from ethanol!), but overall I thought Section III was the strongest section of the book.

Conclusion

While I found some areas of disagreement, I found the book to be enjoyable to read, and I learned a few new things that I didn’t know. Anytime I can do that, I am happy with a book. Those new to peak oil will especially get a lot of value out of the first section; those who know about peak oil will enjoy the latter parts of the book. Finally, each person will probably find that they disagree with one or more of the investment recommendations. That’s bound to any time financial advice is being offered. But you will also find lots of little companies you never heard of - but are worth investigating.

Note: I don’t consider myself to be an expert in investing. While I haven’t done too badly, my style works for me, but it may not suit you. I am a buy and hold, long-term investor. So please don’t write and ask for investment advice. I will not give it, and if you invest in a company that I mentioned in a favorable light, you are on your own.

Book Review: World Made by Hand

When I read James Howard Kunstler’s (JHK) book The Long Emergency, it had a profound impact on me. I had been aware for many years that “running out of oil” was a serious matter. After all, I mentioned the challenge of peak oil in my graduate thesis in 1995. But my focus was more on finding a source that could replace oil as it ran out. Reading The Long Emergency was the first time it really hit me that I was missing a lot of key pieces of the picture.

The book’s impact wasn’t because I thought his vision of the future was necessarily correct, but it made me think about possibilities. It caused me to look at the suburbs in a new light, and to really appreciate how vulnerable the U.S. is to oil shocks. It made me realize that problems will start to crop up – not when we run out of oil – but simply when supplies can’t meet demand. In the U.S., we built a society based on cheap oil, in which one can live 40 miles from work and drive a gas guzzler to and from work each day. As I read his book, it really sank in that this model was likely to come to an end sooner rather than later. And just as soon as I finished reading it, I got a copy of Matt Simmons’ Twilight in the Desert and read it. Those two books helped me decide that I needed to start trying to educate people about energy issues.

In JHK’s latest book – World Made by Hand – he shares his vision of life after oil. It’s a far cry from the future I imagined as a child; a future in which man was conquering the galaxy and we were all flying around like the Jetsons. The future JHK evokes resembles the Wild West of 150 years ago – except with a few modern touches surviving.

The book is set in upstate New York (JHK’s home state) in the fictional town of Union Grove. In this world, life is very hard. There are no cars, electricity is rarely on, wars have wiped out major U.S. cities (Washington D.C. was wiped out on my birthday, 12/21), religion has made a resurgence, warlords carve out territory, and lawlessness is rampant. But communities are much tighter, the food is healthier, neighbors lend a helping hand, and people have to be a lot more self sufficient. I believe these latter aspects of the future world represents the future that JHK would like to see.

As with his previous book, this one caused me to think about possibilities I had not previously considered. I spent a lot of my time pausing to evaluate whether I felt like a particular scenario was likely. I think if you accept the key premise – that no more oil is available – then the future he envisions is probably pretty close to the mark. Oil provides all kinds of conveniences that we take for granted, and I doubt the average person can appreciate how different their world would be if the taps dried up. Yet that is the world that JHK has produced in this novel.

But that’s not the way I think things will play out. If you read between the lines, the book is set no more than 15 years into the future. The date is never given, but there is a mention of a woman in her 90’s who was a nurse in WWII. Assuming 20 as a minimum age, then the setting of the book is some time between now and maybe 2025 at the latest. I simply don’t believe we will lose our mechanized transport options in that time frame.

On my recent trip to India, I saw a lot of people who were using very little fuel, but were still getting around by motorized transport. We have such a tremendous amount of fat that we can cut from our fuel consumption. It may be that by 2020 we do have a lot less oil available, but oil will still be available. And some countries – Brazil for instance – are not likely to run into supply issues for decades. It is hard to envision a world in which the U.S. has no more access to oil, but Brazil is motoring happily along. Even though there isn’t much mention about the rest of the world – mainly because there is little communication with the rest of the world – I couldn’t help but imagine that in JHK’s world there were a lot of countries that would have been able to maintain their fuel supplies.

The book touched upon a lot of themes that I have thought about over the years. Long before I was involved in writing about energy, I was a student of evolutionary biology. One of the things that my studies made me appreciate is that modern medicine has allowed many people to contribute genes to the gene pool that centuries ago would have been cruelly weeded out by evolution. What that means is that most of us are carrying around genes that are only mildly deleterious in the age of modern medicine, but could quickly shorten our life spans without modern medicine. And in this book, JHK pulled modern medicine out from under the population. The result is as I would expect – vast numbers of people died out. I have speculated before that without modern medicine, more than 90% of the population would likely be dead within 10 years from conditions that today don’t trouble us too much.

Consider your own health. Have you been hospitalized for appendicitis? How many times have you required antibiotics to treat something common like strep throat? Have you required surgery? These are all things that can kill without modern medicine. So I have a great appreciation for modern medicine. When I go to a developing country like India that’s one of the first things I think about: Do the people have access to modern medicine?

Another theme that I have thought a lot about – and that JHK tackled in the book – was mining of the municipal dumps. I have often thought about the amount of metals, useful plastics, and just various odds and ends that would be of enormous benefit in a resource-depleted world. I have no doubt that regardless of how the future plays out, there will come a time that we are mining the dumps regularly.

One thing that I haven’t discussed yet is the story itself. I really didn’t expect much from the story. The real story for me was what a world without oil might look like. But the underlying story was actually pretty good. The characters are really interesting, he makes the relationships interesting, and he throws a few surprises into the mix. I have to hand it to JHK – he tells a good tale. Some of the characters (and names) seemed a bit over the top, but otherwise I found myself wanting to know what was going to happen next. So I got a bonus in that aspect.

If you are like me, and you enjoy thinking about possibilities (good or bad), then this book is definitely food for thought. If you want to remain oblivious to the threat of peak oil, or are otherwise convinced that technology will enable the status quo to remain, then you probably won’t care for it (although again the book is worth a read for the story itself).

Note: If you are curious about JHK’s views, the current issue of Business Week has an extensive interview with him:

Good-Bye, Cheap Oil. So Long, Suburbia?

Book Review: Gusher of Lies

I have been a fan of Robert Bryce’s writing for a long time. His style is witty and entertaining, and he is a debunker-extraordinaire. His newest book, Gusher of Lies: The Dangerous Delusions of Energy Independence,is a must-read for anyone interested in energy issues. Concerning the topic of energy and the many myths associated with energy issues, this is a debunker’s bible.

If you aren’t familiar with Bryce, he is the Managing Editor of Energy Tribune, a cornucopia of energy news and analyses (and a regular stop for me), as well as the author of several other books topical to energy. For more, here is his biography from Amazon:

About the Author

Robert Bryce is one of America’s foremost energy journalists. He is currently the managing editor of Energy Tribune and a contributing writer for the Texas Observer. The author of Pipe Dreams: Greed, Ego, and the Death of Enron,and Cronies: Oil, The Bushes, and the Rise of Texas, America’s Superstate,he lives in Austin with his wife, Lorin, their three children, and a hyperactive bird dog named Biscuit.

In the book, Bryce takes on many of the myths that are ingrained in the collective psyche of politicians and the general public. He explains why we are so attracted to the idea of energy independence, but then spends the bulk of the book arguing that the idea of energy independence is delusional. He targets the delusions of both Democrats and Republicans, suggesting that neither major party is serious about addressing America’s energy needs. As Bryce states (and this would be a good description of my own position): “I am neither Democrat nor Republican. I am a charter member of the Disgusted Party.”

Thoroughly researched, with hundreds of references, the book is full of thought provoking and interesting facts. One of the most interesting bits to me was a table showing just how dependent the U.S. is on a wide range of strategic materials. We are at the 100% dependence level on quite a few of them. But the book’s real strength lies in the myth-busting. The book debunks such energy independence myths as: 1). We can farm our way to energy independence; 2). We could abandon the Persian Gulf if we achieved energy independence; 3). Energy independence would reduce the flow of money to terrorists. For a flavor of Bryce’s writing – including some of the themes he tackles in the book, see his Washington Post editorial:

5 Myths About Breaking Our Foreign Oil Habit

In this editorial, Bryce writes:

With oil prices still flirting with $100 a barrel, everyone is talking about the need for “energy independence.” Late last year, President Bush signed the Energy Independence and Security Act of 2007; Sen. John McCain has declared, “We need energy independence”; and Sen. Barack Obama has called for “serious leadership to get us started down the path of energy independence.”

This may all be good politics. But the idea that the United States, the world’s single largest energy consumer, can be independent of the $5 trillion-per-year energy business — the world’s single biggest industry — is ludicrous on its face. The push for energy independence is based on a series of false premises. Here are a few of the most pernicious ones…

While you will often find yourself nodding in agreement while reading the book (or thinking “I did not know that”), there will be things in the book you disagree with - and perhaps sharply. You may raise your eyebrows at Bryce’s assertion that energy independence is not desirable. I read that, and I thought “Not achievable any time soon? Sure. But not desirable?” Some won’t like his take on Peak Oil. Some will feel that some of his writing on terrorism is a digression. I disagree with him on the subject of carbon taxes (more on that below). And corn ethanol supporters will need to round up an army of lobbyists to address his chapter on ethanol.

The ethanol chapter alone is greatness. [Full Disclosure: Bryce referenced me a number of times in the book, but especially in the ethanol chapter. You could thus argue that I have a conflict of interest in this book review - if that makes you happy ;)]. Bryce goes further than I ever have by tying all of the arguments up in one neat package. He covers the subject from angles I have barely touched upon. I can probably now retire from ethanol debunking, because after reading the ethanol chapter I thought “There’s nothing left to debunk.” (In fact, progress on the ethanol FAQ I have been working on ground to a halt after I read Bryce’s ethanol chapter. He covered everything I covered, and more.)

This is not a Peak Oil book. Peak Oil is covered over just a few pages, and the subject is treated agnostically – or maybe even slightly atheistically. The Oil Drum does get a mention in this section, as well as peakoil.com and hubbertpeak.com. But if you are expecting a long discussion of peak oil, that’s not what this book is about.

There was a time when I couldn’t see an iota of difference between Bryce’s positions on various energy topics and my own. It seemed we agreed on everything – right down to small details. However, Bryce gradually abandoned his position that we needed higher carbon taxes, and this is an issue upon which we now clearly diverge. And it took me a while to really pin down why we now disagree on this issue.

I am looking at the issue of carbon taxes through Peak Oil lenses. I see carbon taxes as a way individuals and individual countries can ramp down their energy usage so they are less impacted by supply shocks. I think Bryce is less concerned about these sorts of supply shocks, and is looking more at policies that will increase energy supplies, rather than those that reduce demand. This became clear to me when reading his chapter on energy efficiency. Bryce also feels like it will be impossible to make the tax revenue neutral such that it isn’t regressive. He feels like the U.S. will be putting ourselves at a competitive disadvantage to the rest of the world if we pass higher carbon taxes.

However, to that I say that Europe already has very high carbon taxes, and I don’t believe it is a coincidence that they drive much more fuel efficient cars, don’t have a lot of suburban sprawl, have excellent public transportation, have about half the per capita energy consumption of the average American, and yet still enjoy a very high standard of living. They are more insulated from price shocks than we are, because they are less dependent on fossil fuels than we are in the U.S. But because of the fossil fuel usage habits of the U.S., enabled by a long history of cheap fossil fuels, the world will approach peak oil much more quickly. I see high carbon taxes as a way of slowing down that approach and subsequent decline.

Furthermore, I don’t believe Bryce is consistent on this issue. At one point in the book, he writes “Motorists respond to high fuel prices”, and then he gives examples of how sales of fuel efficient vehicles have taken off as fuel prices crept higher. Isn’t this something we should have been encouraging all along with higher fuel prices? He reiterates this in a section on Brazil, when he points out that Brazil imposes much higher fuel taxes, and this helps explain why their per capita usage is so low. If Brazil can deal with higher fuel taxes, I expect that we can as well in the U.S.

Concluding, I highly recommend this book. It is the best overall book on the reality of the energy situation in the U.S. that I have read in a long time. In fact, specific to that topic, it is probably the best book I have ever read. There are some minor errors (e.g., Saudi’s claimed oil production capacity was reported as their oil production), and even after reading the book I still feel the attraction of energy independence. But I didn’t find a whole lot to quibble with as I read the book.

Grading My 2007 Energy Resolutions

At the beginning of 2007, as I was preparing to move to Scotland, I made a number of resolutions:

My Energy Resolutions for 2007

I updated the story once in Walking the Talk.

Time to look back and see how I did.

1). I resolve to get the most fuel-efficient car I can find in Scotland.

While I could have found a more efficient car, I got a Nissan Micra which gets very good fuel efficiency. The cars that were more fuel efficient would not have fared well on my drive to work.

2). I resolve to search for a house that allows me to take public transport or my bike to work.

I consistently considered the public transport options as I looked for a house, but my work location made this difficult. I ended up getting a house not too far from work (4 miles) but there is no public transport available (unless I want to spend an hour and 2 bus changes getting to work). As far as being able to ride my bike to work, 4 miles would be a piece of cake most places. But on the winding, narrow country road I live on, it would have been a death wish. Most parts of Scotland are unfortunately not conducive to getting around by bike.

3). I resolve to place a very high priority on energy efficiency as I search for a new house.

Done. I rented a house with sky lights, a lot of natural lighting throughout, and a lot of southern exposure. During daylight hours, we never have to turn lights on in the house. Our gas and electric usage have both been very low since moving into our house.

4). I resolve to reduce the meat in my diet (it takes much more energy to produce meat than to produce vegetables).

Done. I have almost cut beef completely out of my diet (much to my father’s chagrin, since he raises cattle). I eat a fair amount of fish and chicken, but I probably eat three times as many vegetables as I did a year ago.

5). I resolve to support local farmers’ markets.

While I think there are some farmers’ markets in the downtown part of Aberdeen, I live in the country. So I never did encounter any farmers’ markets this year.

6). I resolve to continue instilling the importance of energy conservation into my family.

This has been a challenge. My daughter proclaims that she is an environmentalist, and then leaves lights, televisions, etc. on all the time and takes 20 minute showers. (She has been learning a lesson while we are on vacation in Oklahoma, because the hot water only lasts 10 minutes). I point out her energy usage, and ask her - tongue in cheek - why she hates the environment so much. It’s an uphill battle with kids (or adults, for that matter) who just can’t connect the dots of their energy usage to the big picture. But I persevere. I did get into composting this year, and I was able to get the kids involved in that. I think they understand the energy savings from doing this.

7). I resolve to get completely out of debt (easy, since my only debt is a mortgage).

Done. No debt at all.

8). I resolve to talk to at least 1 person a month about Peak Oil and/or the importance of living sustainably.

Done. High oil prices have made it very easy to talk with people about Peak Oil. This is especially true for someone working for an oil company, because oil and gas prices are one of the first things people ask me about. I have had Peak Oil conversations this year in the airport, on a bus, in Walmart, in a restaurant, at work (including one with a member of senior management), and sitting around the Christmas tree.

9). I resolve to preach conservation as something each one of us can do to stretch energy supplies and better prepare for Peak Oil.

Done. This resolution goes hand in hand with the previous resolution. Once people hear about Peak Oil, the first thing they ask is what can be done. I explain that the best thing you personally can do is to get out of debt and tailor your lifestyle toward using less energy. That way, if gas prices go to $5 or $10 a gallon, your budget will be less susceptible to these increases (acknowledging that it is impossible to completely inoculate yourself against escalating prices).

10). Not energy related, but I resolve to read at least 40 books in 2007. I read 48 in 2005 and 34 in 2006.

I fell way short on this one. Between my blog, The Oil Drum, starting a new job, an international relocation, and various other projects, something had to give. It was my reading time. I still managed to read 21, but that was far short of my goal. The five best books I read in 2007 were Neal Stephenson’s Cryptonomicon, Sylvia Nassar’s A Beautiful Mind, Nassim Nicholas Taleb’s The Black Swan, Robert Charles Wilson’s Spin, and Charles C. Mann’s 1491.

Final grade? I give myself a B+. I would give myself an A if I had found a location that would allow me to bike to work. I know it’s only 4 miles, but I chose to live instead.

For 2008, big changes are in store. More on this during Q1 of 2008.

Book Review: Peak Oil Prep

Peak Oil Prep by Mick Winter

For some reason I especially like to read books on Peak Oil, sustainability, and energy issues while traveling. Part of the reason is that traveling always makes me reflective. Part of the reason is that these books are often an ice-breaker that allows me to talk about energy with other travelers. On previous trips I read Jared Diamond’s Collapse and John Howe’s The End of Fossil Energy (reviewed here). On my latest trip I read Mick Winter’s Peak Oil Prep and Al Gore’s An Inconvenient Truth. I started reading Peak Oil Prep during my first flight, and while the man sitting across the aisle from me reading the National Enquirer didn’t show much interest in what I was reading, the woman sitting next to me reading about Christina Aguilera’s confessions in Glamour kept glancing at the book. But unfortunately, she never asked about it and we never struck up a conversation. Opportunity missed.

First of all, I thought the title - Peak Oil Prep - as well as the subtitle - Three Things You Can Do to Prepare for Peak Oil, Climate Change, and Economic Collapse - were both misnomers. This is not a book that will merely come in handy when world oil production peaks. Much of the advice in this book will help you save money and adopt a more sustainable lifestyle while lowering your ecological footprint. The subtitle is a misnomer because there were certainly more than “Three Thing You Can Do.” That was in fact the theme throughout the book: Three Things to Do (in the kitchen, regarding your health, on education, on community gardens, etc.)

The book contained a lot of information that will be familiar toreaders of The Oil Drum. In fact, there was even a plug for TOD on Page 19. However, each section is chock full of links to additional resources. This was the strength of the book, in my opinion. There were a lot of practical tips, but then the author linked to additional information so you could research a topic to your heart’s content. Want to learn to garden using permaculture? Read the permaculture summary on Page 78, and then follow up with one or more of the ten references on permaculture.

This is not a book to convince people of Peak Oil or of climate change. There is a short section in the beginning that discusses these topics, but those are more appropriate for someone who is already familiar with those issues. This is a book for those who have at least a basic grasp, and who are wondering “What can I do?” And that is answered from “A” (acupressure) to “Z” (zoning). This book is essentially a user’s manual for sustainable living.

The book could be repetitive over certain points. While I think it is incredibly valuable advice to tell people to change out their incandescent bulbs for compact fluorescents (and I have done so in the past 3 homes I lived in), I counted no fewer than 7 times this was mentioned in the book. There were also some topics that seemed to be out of place in a peak oil book (e.g. “get more sleep”). By by and large, the advice is topical, worthwhile, and could probably benefit all of us.

Taking Notes

I took 3 pages of notes as I read this book on things that were of particular interest to me. In this section I will share some of those issues.

In the early part of the book, the author makes the case that demand is likely to outstrip supply (which I also think is very likely), and that conflict with China appears possible. He also commented that China is outlawing bicycles in some areas, which came a surprise to me. This is the last thing one should do when fossil fuel resources are diminishing.

On Page 18, the author mentions something that I think we frequently forget about - plastics are made from petroleum. We often think of Peak Oil in terms of energy, but we are dependent on petroleum in many other ways.

On Page 20, he mentions a theme that I don’t think gets enough attention: Even if you don’t believe that Peak Oil is an imminent problem, implementing solutions that reduce your energy usage will lower greenhouse gas emissions. The author calls this a “two-fer”, but given that many of these solutions will also save you money it could very well be a “three-fer”.

On Page 30, the author discusses the benefits of walking, and then describes 10 keys to walkable communities. As I worked my way down the list, I was struck by how most European villages would be aptly described by these 10 keys, but the typical town in the U.S. would not.

On Page 43, Winter starts to hammer home the “localize” theme, which is a familiar one to TOD readers. This something I have put more effort into this past year, as I spent much more time at farmers’ markets.

On Page 61, one of the references caught my eye. It was Dan Chiras’ 31 Ways to Create Sustainable Neighborhoods. That sounded like one to add to my library.

That is probably enough to give a good flavor of the book. Some of the topics covered through the rest of the book were how to compost, solar ovens, beer making, growing your own coffee, and making your house more energy efficient. One point that really caught my attention was the author’s claim that over 50% of the vegetables consumed in Havana (population 2 million) are produced in local gardens. That gives me great hope for the future.

Addressing a Misconception

There was one oil company misconception that I want to address, because I see it frequently. On Page 17, the author states that no new oil refineries have been built in the U.S. since 1976. He then suggests that this may be because there’s no sense expanding facilities if the feedstock is starting to diminish.

I can tell you that the reason no new refineries have been built is not because oil companies are concerned about Peak Oil. When ExxonMobil tells you that there is plenty of oil, they are not just throwing out a smokescreen. This is what they honestly believe. The vast majority of oil companies, in my opinion, believe that we have adequate supplies of oil for quite some time.

The reason no new refineries have been built is that the permitting process is lengthy. A group in Arizona, Arizona Clean Fuels Yuma LLC, applied for a permit to build a new refinery in 1999. It was finally granted in 2005. So, instead of going through the lengthy permitting process, refiners simply expand their existing refineries. The permitting process for this is significantly simpler.

The EIA has written extensively on this issue. The bottom line on refinery capacity:

Much has been made of the fact that no significant grassroots refinery has been built in the United States in nearly 3 decades other than some small simple refineries. Yet, U.S. refinery capacity has increased 1.9 million barrels per day over the last 10 years, which is equivalent to the addition of 1 medium-size refinery per year on average, as refiners attempt to de-bottleneck and make their refineries more efficient, change feedstocks, and add capacity to meet market opportunities. In EIA’s latest Petroleum Supply Annual, Volume 1, although the number of refineries stayed the same between January 1, 2003 and January 1, 2004, capacity increased by 137,000 barrels per day, adding, again, the equivalent of another medium-sized refinery!

So, refiners are expanding capacity. This should tell you that, while they may be wrong, they are betting against an imminent peak.

Conclusion

Overall, this was a solid book that was full of useful resources. This is a good book for anyone trying to live sustainably. For more information, the author hosts 2 Peak Oil websites: DryDipstick.com and BeyondPeak.com.

The End of Fossil Energy

A couple of months ago, I received an e-mail from John Howe, author of the book The End of Fossil Energy and the Last Chance for Survival. He indicated his concern that the public is not getting the message on Peak Oil, and he asked if I would be interested in receiving a copy of his book. I accepted his gracious offer, which I received in the mail a few days later. A couple of weeks later, I read it on a flight to San Francisco.

There is something in the book for just about everyone, but I would especially recommend it as an introduction to the topic of Peak Oil. I told John I would post an essay here in order to help get his ideas out there. He has a 20-page White Paper that you can download here. I will post some excerpts from his White Paper below, but first I wanted to make a few observations.

There were a couple of things that really impressed me about John. First, he has laid out a plan for transitioning to a sustainable energy future. He calls this plan “The Five Percent Plan to Energy Sustainability”, and he covers the details in Chapter 5. By actually committing a plan to writing, John is probably ahead of the vast majority of us in this debate. Most of us have various ideas for what we need to do to achieve sustainability, but I am sure that few of us have put as much thought into it as John has.

The other thing that really impressed me is that John practices what he preaches. He has built three completely solar-powered vehicles, including a 1962 MG Midget and a tractor he uses on his farm. He goes over some of the technical details in one of the appendices of the book. The experience John is gaining with his solar-powered vehicles can be a valuable asset to the world if we will learn from him. If the world had more John Howes out there, I wouldn’t be nearly as concerned about the challenges facing us.

John Howe on His Solar-Powered Tractor

John asked if I could help with publicizing his White Paper, so with that intro, here are some excerpts covering various topics:

Our Addiction to Oil

By 2005, the first indications of peak oil awareness (headlined by the title of this page from President Bush and his 2006 State of the Union Address), started appearing from Washington. On Dec. 8, 2005, the House Energy and Commerce Subcommittee on energy held its first full-scale congressional hearing on peak oil. A bipartisan caucus co-chaired by Rep. Roscoe Bartlett (R-Maryland) and Rep. Tom Udall (D-New Mexico) along with 16 other congressmen prepared resolution 507 beginning with the following paragraph:

Expressing the sense of the House of Representatives that the United States, in collaboration with other international allies, should establish an energy project with the magnitude, creativity, and sense of urgency that was incorporated in the ‘Man on the Moon’ project to address the inevitable challenges of ‘Peak Oil’.

Each time the price of oil and gas ratchets a little higher, the mainstream media gives sporadic attention. Unfortunately, the message the public hears is a blend of obfuscation and short-term excuses such as inadequate refinery capacity or terrorist activity in producer countries. (See “We Were Warned” on CNN, March 18 and 19.) As usual, media coverage is “balanced” by conflicting optimism. See page 12 for the usual delusions. Very rarely is the concept mentioned that the world just might be running out … forever! Very few, big business, the media or most elected leaders can fathom or admit that the oil party is over. We’re now faced with a giant hangover.

As with any addiction or terminal-illness prognosis, the first reaction is denial. How can this be? Our entire economy (and our personal plans) are built on never-ending growth fueled primarily by oil. As reality sets in and logic rears its ugly head, the next response will be … depression, “gloom and doom”. Next, we obviously must begin the weaning process without substitution of hopeless quackery. Finally, a proactive search for honest answers and solutions brings back some optimism even if the best first hope is to encourage others, to join a mass movement of public awareness. Remember, our addiction to oil is only a visible part of the other interrelated problems of excess population and ecological devastation.

Delusions That Will Not Save Us

(But waste valuable time and dollars while we chase them down)

With the onset of peak oil and higher energy prices, there is a flurry of new and, in many cases, revived old panaceas. Some have a touch of legitimacy. Some are pure snake oil, some are only a way to profit either from selling books or from ill-directed research grants and tax incentives. Not necessarily in order:

• Hydrogen-Hype: Now quieting down. Most people understand it has to come from fossil fuels, or if from renewables, is a terribly inefficient way to use precious non-fossil-sourced electricity. In addition, it is very dangerous and technically difficult to handle and store in compressed or cryogenic form.

• Biofuels (exclusive of wood): Sunlight is very dilute and sporadic. Expecting the annual solar energy to replace the millions of years of concentrated solar energy in fossil fuels is impossible. As the fossil fuel base (nitrogen fertilizer, diesel fuel, irrigation- energy, etc.) for our food supply winds down, we will need ALL the biomass energy we can find just to feed ourselves. Also, biofuel production (esp. ethanol from corn) requires about as much fossil energy input as the resultant energy yield. The energy returned on energy invested (EROEI) is too close to unity to be worthwhile. Finally the intensive monoculture of crop land is not sustainable.

• Wood: Somewhere between dilute annual sunlight-energy and concentrated fossil fuels is wonderful wood. But, it takes 50 to 100 years to grow a reasonable tree. Harvest at a quicker rate only depletes the forest, soils, and ecological balance. This signals the end of a civilization and is happening the world over and exacerbated; by increasing population and fossil-fuel powered harvesting equipment.

• There’s Plenty Left: We are now using about 6 barrels of oil (at one billion barrels, worldwide, every 12 days) for every single new barrel discovered. Natural gas is not far behind and can’t be shipped overseas except as liquid natural gas (LNG). Coal and tar sands are more plentiful but contribute heavily to eco devastation and will soon approach an EROEI of unity, especially as oil runs down and the harder-to-reach, dirtier sources are mined.

• Efficiency Will Save Us: Only if we concurrently reduce consumption (reverse growth and population). In most cases improved efficiency increases consumption due to increased value and numbers of consumers. (“Jevon’s Paradox”) In the long run, we must survive with no fossil energy at all.

• Other Sources: Nuclear, hydro, geothermal, solar, and wind are all legitimate. But, except for solar and wind, all are limited by site availability or in the case of nuclear, finite fuel and waste problems. Total energy will be much less without fossil-fuels.

• “Pie in the Sky”: Abiotic oil, nuclear fusion, methyl hydrates, shale oil, perpetual motion machines, etc. None are proved.

Non-fossil Energy Sources

The Three fossil fuels (oil, coal, and natural gas) represent a non-renewable “bank account” being drawn down at an annual rate leading to complete depletion or the point of negative energy return on investment (EROEI) in less than one lifetime. This prediction can be challenged but more optimism will, in no way, change the obvious threat of the “Triple-Crisis.” New unexpected discoveries might provide extra time and a better chance to effect a transition protocol to less population and a much lower-energy future. However, the desperate consumption of additional fossil fuels will only exacerbate the global warming component. A sustainable future can only come from sustainable, clean energy.

Nuclear

The best bet for continued, clean electricity on a large scale. But, sources of finite, fissionable uranium must be found and ultimately mined without cheap fossil energy. This scenario also assumes that acceptable waste disposal and protection from terrorism can be assured. Also, nuclear, like all other non-fossil energy sources except biofuels, produces only direct electricity. No matter what energy sources we use we will need a complete rethinking of our transportation system.

Hydro

Limited to acceptable sites nearly all of which have been used. Global warming has reduced water flow and electrical output in the last decade. Considerable fossil energy is required to replace dams, which ultimately fill with silt. Reversible pumped hydro at 85% efficiency (as well as nuclear) can be used to smooth the sporadic output of solar and wind.

Biofuels

Only for absolutely essential needs as liquid fuels, lubricants, etc. and with full understanding of the required energy input and the deleterious effect on crop land and food supply. See pages 7 and 12 for more details. Waste products will decline as a source of fuel because the original energy sources are finite and depleting.

Geothermal, Tidal, Wave, etc.

All are site specific and cannot be scaled up to be of importance.

Wind

A true, clean source that can be scaled up extensively especially while fossil fuels are still available for manufacture and installation. Sporadic electrical output could be smoothed by working in concert with solar PV and other available sources.

Solar PV (photovoltaic)

The best modern technology providing direct electricity on a local or centralized basis. Very dilute and sporadic but infinitely scalable and especially applicable to residential use as well as direct solar-powered tractors and cars. In all cases, the weak output needs to be coupled with battery storage and/or other sources. This is our best bet for a long, clean future including agricultural power and transportation. Small urban and suburban farms could use approximately 100 volt tractors with integral solar-panel arrays and large battery-packs. Huge commercial farms might better use a large portable separate array of 4 to 8 kilowatts peak power (300 to 600 square feet). With a 200 ft. #8 cable, this concept would allow working up to 3 acres almost on a one to one energy basis as long as there is direct sunlight. The portable central array could be moved to a new location or brought to the farm buildings in off-season. The high cost and availability of PV will require a 50 year scale-up from present minuscule levels. We need massive investment in solar PV and lead/acid battery recycling facilities.

The Low-Energy Community

The key component for a low-energy sustainable future is a community center with the following objectives:

1. Strive for a balance between peripheral AGRICULTURAL land, which can sustainably supply food for the farmers and community center inhabitants. This food supply will ultimately rely ONLY on manual or draft animal power, solar-powered tractor power or biofuels made locally, IN LIEU of food. Fossil-fuel based fertilizer, herbicides, pesticides, and irrigation will diminish.

2. Transportation energy will become unavailable except for electric or muscle power. Therefore the furthest distance to a community center would be a radius of about 20 miles. Present U.S. arable land of about 300 million acres will not be able to provide for 300 million inhabitants at today’s rate of 10 energy units of fossil fuel input for each single energy unity of food output. Ideally a 20 mile radius (800,000 acres) with one-half (400,000 acres) perfectly arable land could support 250,000 people with approximately 200,000 in non-agricultural roles. The others 50,000 would live on 10,000 farms, each with approximately 80 acres with one-half tillable. The other half of the land would be forest, green space, and recreation area. On this basis, a downsized U.S. population of 250 million people could live on 1,000 such community centers utilizing 800 million acres or about one third of the total U.S. land area.

3. The community center will provide the energy -mixing hub for surrounding self-generating residential energy services as well as centralized energy sources. It would also be a community center and transportation hub for intra-city electric-rail travel and shipping, which may also connect to traditional water travel routes.

The above model is only an idealized form. Obviously our present urban and rural structure WILL HAVE to gravitate in this direction as any other arrangement has to be compromised by the available food supply and limited by local and long-distance travel requirements. Food production and travel (movement of people and/or commerce) will be the greatest challenges of the future. Domestic heating and power are a little less serous but still very difficult. Reduced population (see page 13) is essential to implementing a 50-year plan based on relocalized community living. Traditional walkable urban centers are obviously a key part of the low-energy community concept.

Personal Action

Obviously, our only chance is to enact massive change on a national level. But, national redirection only happens as a response to a ground swell of combined personal action … a protest movement or a revolution. Nothing will happen if individuals do not take their fate into their own hands. In addition, there are many things individuals should do to be ready for the coming crises whether they be power shutdowns, food shortages, or climate-caused catastrophes. Remember, don’t plan on calling someone on your cell phone to come and save you. Everyone will be too busy saving themselves. Below are actions you can take immediately:

1. Continue to educate yourself about energy, population, and ecology. Don’t be misled into complacency by the delusions (page 12). Tell others what you’re learning.

2. Drastically decrease your personal gasoline consumption. (One-eighth of the world’s petroleum goes to American motoring). This will save money as prices steadily rise. If you can’t afford a hybrid, buy one of the many cars that get 35 mpg and drive half as far. This is the easiest first step.

3. Plan to heat only a core area of your home (kitchen, bathroom, laundry, and living area) to less than 65 degrees F for the winter months. Wear much warmer clothes. Three hundred square feet per person would be luxurious for 99% of the world. Rearrange water pipes and insulation accordingly. In hot climates, rearrange living area into a cooler zone (cellar, breezy area) to minimize air conditioning. When the weather cooperates, you can expand back into the rest of your home. All of the above will require only a minimal expenditure, not rebuilding.

4. Grow a garden. Dig up the lawn, fertilize and build up the soil. NOW! It takes a few years to get up to speed. Remember one acre could be a commercial farm in China. You’ll be healthier and happier than riding the lawn mower. Learn where food comes from and how to store it. A good part of suburbia is built on good farm land. Buy a copy of Mother Earth News.

5. Get the kids involved and start your own solar photovoltaic system. A couple 150 watt panels, charge controller, batteries, and 1000 watt 120-volt inverter costs about $3000. Don’t worry about inter-tieing with the grid. This will be your educational and emergency back-up system. Check state incentives.